Compass Directions Morning Report Tuesday, 3 January 2012

As the holiday season comes to an end, European leaders will once again face the daunting task of addressing how they will save the eurozone from economic meltdown. In the year that will mark the 10th anniversary of the introduction of the com-mon currency, leaders will need to work hard to contain the widening debt crisis in Italy and Spain that threatens to bring down the eurozone and place the EUR into the annals of history as another failed experiment to bring permanent peace and union to Europe. The Euro closed the final session of the year at 1.2930 while the GBP held at 1.5500. The AUD managed to hold above 1.0200.

News over the weekend that Iran has produced its first nuclear fuel rod may see a very cautious start to the year as markets reopen for the first session of 2012. The Iranian Students News Agency has reported that a domestically made fuel rod was inserted into the core of Tehran’s atomic research reactor which, according to the news agency, produces radioisotopes for cancer research. The news will certainly lead to a rise of geopolitical tensions in the region as the West must certainly act to impose more sanctions on the nation which they accuse of maintaining a covert nuclear weapons programme.

US Equity markets fell in their final session of 2011.The S&P 500 ended the year almost exactly where it started, barely changed, losing 0.04% to 1,257. This was the smallest annual change in the index since 1947. On the day, the index lost 0.43% to 1,257.60 in a week which saw Spain’s widening budget deficit and a surge in the size of the ECB balance sheet off-set continued strength in US economic date releases. Earlier in Europe, bourses managed to make gains with the DAX ris-ing 3% to 6,075 while the FTSE gained 0.1% to 5,572.

Commodity prices rose in the last session of the year with the CRB index rising 0.75 points to 305.40. Crude oil prices fell in the final trading session of the year with the European debt crisis continuing to haunt investors. However, crude has still managed to gain for the third consecutive year after rallying 25% in the last quarter closing down 0.82% to $98.83 on the day. Precious metals gained with gold higher by 1.68% to $1,567 and silver gaining 2.2% to $27.92. Soft commodities broad-ly gained while copper rose 1.96% in the final session. A largely data free day should see subdued trading conditions today.

GOLD traded in a $1,556 to $1,581 range in the least session of 2011. It is likely to open the new year higher as news of Iran successfully producing its first nuclear fuel rod breaks and investors seek to buy as a safe haven. Gold closed 2011 approximately 10% higher for the year to record its 11th year of consecutive gains. It traded in an approximate range of $1,310 to $1,919 for the year and outperformed all major asset classes including global equities, bonds and the US dollar. The recent volatility and falls from the high to critical support over the past fortnight, we believe, are the culmination of high profile liquidation of long gold positions by hedge funds to offset loses in other asset classes. We expect a resumption of the uptrend for gold to peak above $2,000 in 2012 if critical support at $1,530 continues to hold. However, we remain neutral gold in both the short and medium term until we have confirmation of price stabilisation on a recovery of the $1,640 level.

AUD/USD continues to surprise us with its remarkable resilience given the worsening situation in Europe. The currency is currently being supported by relatively strong data out of the US and stabilising US equity markets. The trading range over the past few days since December 30 has been 1.0140 to 1.260 and the currency opens the morning at 1.240. In a volatile and dramatic year in the global markets the currency has done remarkably well to hold above parity. In 2011 it traded as low as 0.9390 to above 1.1070. Its rise and fall this year has been largely linked to the performance of US equities and the EUR. Remarkably, like US equities, it has closed the year at almost the same level where it closed last year around 1.0200. Everything changes, everything stays the same. We have remained consistently bearish the AUD in 2011 and continue to expect a fall to 0.95 within the next few months as the reality of the European debt crisis and slowing global growth take its toll.

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